Clear Eyed Capitalist

Archive for November, 2005

BGI has an “Entrepreneur in Residence” when we’re there, someone who has run a business and has lots of experience to share. For the October Intensive our guest was Dal LaMagna, also known as “Tweezerman”. It may sound a little funny, but Tweezerman was big business and he sold the company in 2004 for big bucks. He was a fascinating speaker with lots of stories of building the business. He also cared seriously about social responsibility before it became a buzzword. He believed basically in being honorable and treating his employees, customers and suppliers well. He focused on communication with all three. With employees he believed you had to let people make mistakes and grow. Dal also believed in rewarding them – he distributed 20% ownership of his company to employees through ESOP and bonus programs and was very proud that after he sold the company he personally wrote a check to each one, distributing over a million dollars since there were 200 of them. With his customers Dal first gave them an unconditional lifetime guarantee for the product – if your tweezers ceased to satisfy you could send them back and they’d be refurbished. The company also supported causes that were meaningful to the customer base like breast cancer awareness. With suppliers, if Tweezerman couldn’t make a payment on time Dal made sure the suppliers knew why and when the payment would be made, and then unasked he would pay interest.

However, as charming and friendly and caring as Dal was, he’s also a Harvard Business grad and no chump. So interesting to me was that he was careful to maintain power in supplier relationships. When Tweezerman agreed to carry a product, the supplier had to agree to supply Tweezerman exclusively. Yet Tweezerman would always be sure to have multiple suppliers for every product, thus ensuring that the company could not be held hostage or damaged by any one supplier. So while Dal was a benevolent king when not crossed, he still was king.

That’s interesting to me as a social responsibility challenge. SR companies have to play in the marketplace and many companies in the marketplace play by a screw or be screwed rulebook. If that really is the majority behavior, then until regulations alter the marketplace an SR company has to play the power games to win, and then choose to wield that power benevolently and police the behavior of their market partners. However the other possibility I hope for is that there are enough companies out there that don’t measure their success by how many other companies they outmaneuver or win-lose negotiate with. Then being successfully SR is about identifying who plays by relationships vs who plays by points and building a network of the right relationships.

Ah November, and I’ve returned from another 4 day INTENSE-ive. Which now I share with you.

Thursday: Is Capitalism democratic? We often tie democracy and Capitalism together, but what does it mean? In Economics we discussed how having a democracy means people have an ability to participate meaningfully in the decisions that are socially consequential for them. First among such issues – how we distribute the surpluses of production: profit.

Any successful joint enterprise must generate enough revenue to pay the wages of its employees and directors and replace wear on capital equipment needed to run the business. Beyond that, the enterprise generates a surplus. How is this surplus distributed? Today that decision is made primarily by the people who run the enterprise. Not surprisingly, they allocate most of that surplus back to themselves and their shareholders. It’s not entirely unreasonable – it makes sense for society to decide that we should distribute a significant chunk of our surplus to those with a proven track record in making investment grow and encourage them to do more of the same. But the kicker here is that we’re not making that decision “as a society”. A very small group of wealthy leaders make that decision for us.

When we cut taxes for the wealthy and for corporations, what we are really cutting is our right as a society to have our say in how the surplus generated by our joint efforts gets distributed. What we are cutting is democracy. Democracy and capitalism CAN go together, but it’s not mandatory.

Friday: Our Entrepreneur In Residence this session was a winemaker. He told some fascinating stories about the decision of his company to live in harmony with the land as part of making top-notch wine. They would set annual goals that were triple-bottom-line (though he was a bit ahead of the curve so didn’t have that name.) They did the 3-Es: Environment, Equity (social), and Economic. Sample goals might be things like “increase the % of organic cultivation”, “improve employee benefits” and “reduce waste”. He noted that in truth, every goal impacts every other goal – you can’t ignore the Economic impact of your Environment initiatives. When they set a goal of converting to renewable energy, they discovered they couldn’t afford it: it cost 4% more. But because it was a goal they didn’t abandon the idea – they looked harder for ways to cut energy usage and did so, enabling the switch.

I think this is very key: sure, they could have just made those energy usage cuts and kept the extra profit. But business is about priorities in an environment of constant change. You must make choices about where you focus your energies. If they didn’t have that sustainability mission in the first place, they would have been focusing their attentions elsewhere and never thought about those energy cuts. You have to have the mission to get the reward. But did that time and effort invested turn to nothing since it didn’t result in a profit increase? It did make their business better – by insulating them from rising oil prices (aren’t they geniuses now!) and giving them an identity that strengthens their relationships with employees and customers.

Saturday: We gave our “Business Case for Sustainability” presentations, a highly intimidating task given we’d seen a published author on the topic (Bob Willard) do it just the night before. Fortunately I wasn’t in the group he was observing! I was rated decently for style, but didn’t have enough numbers. Several of my fellow students had impressive presentations though. Fellow student David Bangs is well on his way to consulting in energy efficient lighting. Another presenter included the case of New Belgium Brewery – another company that switched at least partially to renewal energy a few years ago and is reaping significant benefits now. In hindsight, it’s great! That presentation, plus the two of the day before got me thinking that the advantage of sustainability is that it protects you against future hazards. Rather than just doing targeted defense and trying to predict the future, all you have to do is invest a little and you mitigate all kinds of risks. Taking care of employees and resources like the environment is a fundamental part of business that has just been neglected because of our focus on what can be measured and the tools we use to do it.

Sunday: Another engrossing day of Economics. Two fun nuggets:

Economic Concentration. CR4 is the % of the market controlled by the top 4 companies in the market (Concentration Ratio). Our hero and prof, Hector, read off some CR4 stats: 95% for the cereal market; 72% for beer;100% for tennis balls. Highly concentrated markets are not good for competition. I realized that the prisoner’s dilemma shows how it’s almost impossible for companies to not end up colluding when there are so few competitors, how can they NOT read each other’s market signals?

The Social Structure of Accumulation. Our GDP depends on consumption. Our consumption is in a vicious cycle (a reinforcing loop!) of low wages to support low prices to be affordable to those low-wage workers. Those low-wage workers are filling the gap with increasingly more credit. Especially after the new bankruptcy law, they are well on their way to discovering Debt Servitude.